In Re: Security and Exchange Commission Ex Rel. Helene Glotzer and Jill Slansky, and Helene Glotzer and Jill Slansky, Securities and Exchange Commission, Ex Rel. Helene Glotzer and Jill Slansky, Movants, Todd Semon, on Behalf of Himself and All Others Similarly Situated, Thomas Pratt, Rex Weimer, Howard Rosen, on Behalf of Himself and All Others Similarly Situated, Donald MacKinnon on Behalf of Himself and All Others Similarly Situated, Ivan Crnkovich, on Behalf of Himself and All Others Similarly Situated, Barbara Crnkovich, on Behalf of Herself and All Others Similarly Situated v. Martha Stewart, Living Omnimedia, Inc.

Citations: 374 F.3d 184; 2004 U.S. App. LEXIS 13821Docket: 03-3125

Court: Court of Appeals for the Second Circuit; July 6, 2004; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The Securities and Exchange Commission (SEC), represented by attorneys Helene Glotzer and Jill Slansky, sought a writ of mandamus to vacate a District Court order that compelled compliance with a subpoena issued by Martha Stewart. The Second Circuit Court of Appeals ruled on December 24, 2003, that the district court lacked subject matter jurisdiction over Stewart's motion to compel. 

The backdrop of the case involves a securities fraud action initiated in August 2002 by shareholders of Martha Stewart Living Omnimedia, Inc. (MSO) against the company and its executives, including Stewart. Plaintiffs alleged that Stewart made false statements regarding her sale of shares in ImClone Systems, which inflated MSO's stock value, violating federal securities laws. 

Following an indictment of Stewart and her stockbroker, Peter Bacanovic, by the U.S. Attorney’s Office in June 2003, the SEC launched a civil enforcement action with similar allegations. As a result, the class action parties agreed to pause any discovery involving Stewart until the criminal case concluded. However, the district judge rejected this agreement and allowed Stewart to conduct discovery, leading to her issuance of subpoenas to Glotzer and Slansky, who were to testify for the government in the criminal case.

The SEC's Assistant General Counsel informed Stewart that Glotzer and Slansky could not testify without SEC authorization. He questioned the appropriateness and relevance of their potential testimony but requested the specific questions Stewart intended to ask, which her attorneys declined to provide.

On November 4, 2003, the SEC's Associate General Counsel, Richard M. Humes, declined to authorize depositions of Glotzer and Slansky, citing that depositions of opposing counsel are generally disfavored and that the conditions for permitting such depositions were not met. The SEC expressed concerns that the requested testimony would likely be protected under attorney work product privilege. Subsequently, on November 17, 2003, Stewart moved to compel compliance with the subpoena in district court. The SEC opposed this motion, arguing that Stewart had not exhausted her administrative remedies under the Administrative Procedure Act (APA), specifically 5 U.S.C. §704. After oral arguments on December 5, 2003, the district judge ruled in favor of Stewart, stating that the APA's exhaustion requirement did not apply and ordered the witnesses to appear, warning of contempt for noncompliance.

On December 15, 2003, the SEC filed an emergency motion for a stay of the district court's order and a petition for a writ of mandamus. The court heard oral arguments on December 23, 2003, and subsequently granted the writ of mandamus, vacating the district court's order for lack of jurisdiction and dismissing the motion for a stay as moot. The court noted that the writ of mandamus is typically reserved for exceptional cases and that pretrial discovery orders are generally not subject to direct appeal. However, it acknowledged that mandamus could be appropriate if a discovery issue is of extraordinary significance or if there is an urgent need for reversal before trial. The court outlined criteria for such cases: the presence of a novel legal question, inadequacy of other remedies, and a legal issue that would aid in administering justice. The court determined that the current case met these criteria, particularly regarding the novel question of whether the APA’s exhaustion requirement applies to motions to compel government agency compliance with subpoenas, which could help clarify procedural frameworks for similar disputes.

The district court's order is not immediately appealable, necessitating the use of mandamus by the SEC to protect its interests. Without mandamus, the SEC faces the dilemma of either complying with the order, which undermines its enforcement authority, or risking contempt for non-compliance. Although typically a litigant must disobey a discovery order and face contempt to appeal, this situation is unique due to the SEC's claim that the district court lacked jurisdiction over the motion to compel. This assertion indicates a significant interference with agency authority, highlighting the urgency for relief. Additionally, the implications of requiring executive officials to face contempt differ markedly from those for private litigants, potentially straining inter-branch relations. 

The resolution of the SEC's petition will also contribute to the administration of justice, as existing case law is sparse and conflicting regarding the applicability of Administrative Procedure Act (APA) provisions in similar scenarios. The SEC has put forth various arguments, contesting the district court's discretion in compelling SEC attorneys to testify in a civil suit, but the court determines that it does not need to address these arguments since the district court initially lacked jurisdiction.

SEC regulations mandate that individuals in similar positions to Stewart must utilize administrative routes before seeking federal court enforcement of subpoenas. The SEC's General Counsel is authorized to approve non-expert, non-privileged testimonies and must respond to subpoenas accordingly. Any SEC officer served with a subpoena for confidential information must decline to comply unless authorized by the General Counsel. Furthermore, individuals aggrieved by such refusals must file a petition for review with the SEC within ten days of the General Counsel's decision before seeking judicial review.

Compliance with intra-agency review procedures is mandatory in actions under the Administrative Procedure Act (APA) where §704 applies, which states that judicial review is only available for "final agency action." This section emphasizes that agency action is considered final regardless of whether a declaratory order or appeal has been filed, unless expressly required by statute or agency rule. Exhaustion of all intra-agency appeals is explicitly mandated for judicial review. In the case at hand, Stewart acknowledges her failure to file a petition with the SEC to review a prior decision, thereby not exhausting her administrative remedies as required by 17 C.F.R. §201.430(c). She argues, however, that this failure does not affect the district court's jurisdiction, claiming that APA §704 does not apply.

Stewart references previous decisions, particularly in EPA v. General Electric Co., where it was held that an agency’s non-compliance with a subpoena constituted "agency action" reviewable under APA §702. However, on rehearing, the court did not definitively resolve the applicable standard of review for such agency actions. Stewart interprets this as a rejection of the exhaustion requirement in motions to compel agency compliance, but this interpretation is not upheld. The court maintains that the ruling in EPA v. GE I, which affirmed that motions to compel are considered "agency actions" subject to review under APA §702, remains valid. This stems from the principle of sovereign immunity, with the APA providing a waiver for actions seeking review of agency actions, thus allowing federal courts to consider motions to compel without violating sovereign immunity.

The court clarified that in EPA v. GE I, the administrative exhaustion requirement under APA §704 was not addressed, and in EPA v. GE II, the court declined to determine if APA §706's standard of review applied to the EPA's refusal to comply with a subpoena. Other circuits have ruled that APA §706 does not govern motions to compel agency compliance with subpoenas. However, this does not support the argument that exhausting administrative remedies is optional, as the issue of administrative exhaustion was not raised in either EPA case. APA §704 serves as a procedural prerequisite for judicial review under the APA, unlike APA §706, which is a standard of review. The purpose of requiring exhaustion is to allow agencies to correct their mistakes and maintain efficient judicial processes. The court concluded that any party seeking judicial review of an agency's non-compliance with a subpoena must first exhaust administrative remedies as mandated by APA §704. Judicial review under APA §702 hinges on the existence of a "final" agency action, which occurs only after all administrative remedies have been exhausted.

Stewart did not exhaust her administrative remedies, rendering the SEC's actions outside the scope of the Administrative Procedure Act (APA) review, and the APA's waiver of sovereign immunity was inapplicable. Consequently, the district court lacked subject matter jurisdiction to consider her motion to compel. The criteria for issuing a writ of mandamus were met, leading to the granting of the SEC's petition and the vacating of the district court's order that compelled compliance with a subpoena directed at SEC attorneys Slansky and Glotzer. The SEC's petition for a writ of mandamus was granted, and the district court's December 5, 2003 order was vacated. The SEC's motion to stay the district court's order was deemed moot. 

It was clarified that Stewart, not MSO, issued the subpoenas and that Stewart alone responded to the petition for a writ of mandamus. Stewart's citation of National Super Spuds, Inc. v. New York Mercantile Exchange was misapplied, as it pertained to appealability rather than mandamus, and the court acknowledged that mandamus could be available before a direct appeal for clear abuses of discretion or to address significant issues regarding the district court's authority.

Key provisions from the APA were referenced: §702 allows for judicial review of agency actions by individuals adversely affected, and §706(2)(A) mandates courts to set aside agency actions deemed arbitrary or not in accordance with the law. Additionally, Federal Rule of Civil Procedure 45(c)(3) outlines conditions under which a court may quash or modify a subpoena, placing the burden on the agency to justify non-compliance.

In EPA v. GE I, the court noted that a subpoena aimed at a subordinate agency employee could be unenforceable under the Touhy doctrine, which protects employees from compliance when a valid agency regulation prohibits it without authorization. However, the court determined that the Touhy rule did not apply since the response to the subpoena came from the EPA's General Counsel's designee, who is the ultimate decision-maker. Similarly, in the present case, although the subpoena was directed at individual employees Glotzer and Slansky, the refusal to comply originated from the SEC's General Counsel's designee, thus rendering Touhy inapplicable.

Stewart contends that sovereign immunity issues from EPA v. GE I are irrelevant here because a motion to compel an agency employee's testimony does not compel or restrain government action, citing Dugan v. Rank. Stewart argues that this negates the need for the APA's jurisdiction and its exhaustion requirement. However, it is clarified that the motion to compel targets the agency’s ultimate decision-maker, necessitating the SEC's Office of General Counsel to authorize the testimony, which is akin to compelling agency action, similar to a motion for documents. 

Finally, the APA §704 allows an agency to waive exhaustion requirements if it finds them unnecessary, allowing its action to be deemed "final" and subject to review under the APA, as illustrated by the precedent in Weinberger v. Salfi regarding the Social Security Act.